Tim Middleton

Mutual Funds11/6/2007 12:01 AM ET

Cash in your oil profits now

Natural resources will be one of the best-performing sectors in the long term, but $95 for a barrel of crude is almost certainly a bubble price.

By Tim Middleton

Investors acted like the party was over last week when ExxonMobil (XOM, news, msgs) reported a 10% drop in quarterly profit. The Dow Jones industrials ($INDU) plunged 2.6%, more than 360 points, on Thursday, and crude oil slipped 1.1% to $93.49 a barrel.

The previous day, the Federal Reserve all but announced it was done cutting interest rates with a quarter-point trim to 4.5%. Investors had been expecting further cuts, and those expectations were, as Wall Streeters like to say, baked into the cake. Result: Thursday's big belly-flop.

If inflation remains quiet, higher oil prices are not likely to stand. China reduced its subsidies of the price of petroleum by 10% last week. That alone will dampen demand significantly. Also, traders say lofty prices for crude have been partly driven by hedge-fund speculation.

"I think some (commodities) are ahead of themselves at the moment, and one of them would be crude oil," says Charles M. Ober, the veteran manager of the T. Rowe Price New Era Fund (PRNEX), which has two-thirds of its assets in energy and the balance distributed among such commodities as base and precious metals.

Ober thinks crude will fall to about $75 a barrel. So does Sam Stovall, the chief equity strategist for Standard & Poor's.

"We think $95 a barrel is a bit high; we'd feel more comfortable at $75," Stovall says. Nonetheless, S&P continues to recommend overweighting energy.

Harvest those profits

"We're scratching our heads about energy ourselves," Stovall confesses. "We do have it as an overweight right now, but we don't want to be the last one to leave the party."

Nor do you want to be the last one to join it. Energy is by far the market's hottest sector, with the average natural-resources mutual fund ahead 35.9% this year, as of Oct. 31. Annual gains have averaged 30.3% over the past five years, almost double the returns of the S&P 500 Index ($INX).

That draws performance chasers, and you don't want to be among them. In fact, if you've owned energy for those five years, it has probably grown way beyond the 5% of so of assets that most investment advisers recommend. You might want to sell down to that 5% level.

Energy is extremely volatile. In this summer's subprime-mortgage explosion, iShares S&P GSSI Natural Resources (IGE, news, msgs), an exchange-traded fund I own in MSN Money's model ETF portfolio, shed 10.4% of its value between June 18 and Aug. 16.

So if you don't own a natural-resources fund, I would recommend that you wait for weakness, because it's bound to come. But in the long term, I think resources are one of the market's most inviting opportunities. Demand is likely to exceed supply for years to come. An added bonus: Inflation protection is built in.

Video on MSN Money

Jim Jubak
How to handle a commodities dip
It looks like prices for commodities like oil, gold and copper are set to level off. But these are corrections within a long-term upward trend, not a major change in direction, says MSN Money's Jim Jubak. So investors can take some profit but probably want to stay the course.

Think long term

Natural resources have enjoyed a bull market for five years now, and yet their rising prices haven't generated significant inflation. Rather, the global economy is expanding at the fastest rate in human history, creating customers faster than producers can mine, pump or pulp.

In the United States, meanwhile, "as we've moved from an industrial to a service economy, the impact of oil prices has become less," notes Joseph Brennan, the head of portfolio review for Vanguard. "The average personal-consumption expenditure on energy since 1960 is about 3.8%. And it was that exact same percentage in September," even with the higher oil prices.

Continued: Some facts to consider

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